Money can grow on trees

Forests are disappearing because they are undervalued

FROM a helicopter, East Kalimantan, a province in the Indonesian part of the island of Borneo, presents a dreary view. Where little over a decade ago rainforest transpired under a vaporous haze, the ground has been cleared, raked and gouged. Every few minutes, a black smudge, smattered with muddy puddles, denotes a coalmine. Angular plantations, 10km and more across, are studded with dark green oil palms. Tin roofs glitter on the shacks of loggers, miners and planters, each with a smallholding hacked out around it. Just a few straggly patches of forest remain, with greying logs scattered at their edges.

As often in Indonesia, commercial loggers in East Kalimantan have grossly exceeded their quota in a small fraction of their allotted time. Prematurely abandoned, the degraded forest then falls to illegal loggers or it is cleared for agriculture, often by fire. In dry spells, which are becoming more common, the flames get out of hand. In 1998 fires devastated more than 5m hectares of Indonesian forest.

Yet in the national accounts the clearance is recorded as progress. About a quarter of Indonesian output comes from forestry, agriculture and mining, all of which, in a country more than half-covered in trees, involve felling. But this is bad accounting. It captures very few of the multiple costs exacted by the clearance, which fall not so much on loggers and planters but on poor locals, all Indonesians and the world at large.

The Indonesian exchequer, for one, is missing out. Illegal logging is estimated to cost it $2 billion a year in lost revenues. But that can be fixed by policing. A bigger problem is that most of the goods and services the country's forests provide are invisible to the bean-counters. Many of them are public goods: things like clean air and reliable rains that everyone wants and nobody is prepared to pay for. And where they are traded, they are often undervalued because their worth or scarcity is not fully appreciated.

Forest economics is plagued by these problems, partly because forests provide so many benefits. A UN-backed project in 2005, the Millennium Ecosystem Assessment, identified 24 main ecosystem services, most of which are found in forests: from preventing natural hazards, such as landslides, to providing the eco- in ecotourism. Yet most relate to forests' role in the carbon and water cycles and in safeguarding biodiversity. And almost none is priced on markets. Forests are usually valued solely for their main commercial resource, timber, which is why they are so wantonly logged and cleared.

This leads to a profusion of damaging outcomes such as forest fires and lost ecotourism revenue that happen because those responsible are not obliged to pick up the tab. The inferno in 1998 is estimated to have cost over $5 billion in timber alone. According to another UN-backed effort, The Economics of Ecosystems and Biodiversity (TEEB), “negative externalities” from forest loss and degradation cost between $2 trillion and $4.5 trillion a year.

To tackle both problems, it may help to come up with a better evaluation of what forests are worth. That could open up new markets for their bounties through payment for ecosystem services (PES), in the jargon. Or the valuation alone may be sufficient to give pause to the axeman, or the taxman. TEEB's experts are now putting price tags on forests and other natural boons, typically by calculating the opportunity cost of cutting them down and selling them off.

A draft TEEB report on the Amazon rainforest exemplifies its approach. It estimates the forest's contribution to the livelihood of poor forest-dwellers, of whom there are at least 10m in Brazil alone, at between $500m and $1 billion a year. That is based on the estimated market value of the fish and thatch they take to subsist, and the gums, oils and other goods they harvest for cash. On a regional scale, TEEB estimates that the rainforest's role in avoiding siltation in hydro-power reservoirs is worth anything from $60m to $600m a year.

A superior insurance policy

TEEB puts the rainforest's contribution to South America's agricultural output, through regulating the continental water cycle, at $1 billion-3 billion. That is based on a guesstimate of the drop in output that might result from even a small deforestation-related decline in precipitation. But Pavan Sukhdev, an economist with Deutsche Bank who heads TEEB, reckons the real figure might be ten times as much, given what Amazonian farmers seem willing to spend on insurance against rain failure.

As such wide-ranging numbers suggest, trying to price ecosystem services on such a big scale can be a mug's game. The risks associated with ecosystem collapse are not well enough understood for any hope of precision. And whatever huge figure is arrived at will be notional, because no one can afford to pay it, which can invite feelings of helplessness. Yet the idea is that no one should need to pay it. And there is evidence that such valuations can indeed spur remedial action costing very much less. That was the effect of Lord Stern's influential 2006 paper on the economics of climate change. And if the dream of international co-operation it elicited has generally faded, it still hangs, vaporously, over the forests. REDD, the nascent effort to persuade tropical countries to leave their forests be, is an effort at PES on a global scale. In forest economics, that is the Holy Grail.

At a lower level, bean-counters are becoming a bit less blind to nature's bounty. For example, to mitigate inland flooding, Vietnam chose to spend $1.1m on planting some 12,000 hectares of mangrove forest, thereby saving $7.3m a year on dyke upkeep. To encourage such decisions, American scientists have developed an ingenious piece of software called Integrated Valuation of Ecosystem Services and Tradeoffs (InVEST). In handy colour-coded maps it predicts the economic and environmental fallout of any proposed land-use change. This could revolutionise land-use planning. China is already using it to pick the best places for new protected areas on a quarter of its territory.

China has one of the world's biggest PES schemes, a decade-old reforestation effort that has delivered 9m hectares of new forest. Launched in response to flooding of the Yangzi river, it involves paying farmers $450 a year per reforested hectare. Costa Rica is another PES trailblazer. Since 1997 it has made payments of $45-163 a hectare to encourage forest conservation, planting and agro-forestry. The money comes from a hydroelectric power company which is keen to protect its watershed; the World Bank, which reckons Costa Rica's forest biodiversity is a global good; and a 15% surcharge on petrol. The country's deforestation rate is now negligible.

Perhaps ominously for REDD, however, this scheme may have been less effective than many suppose. Costa Rica's clearance was also reduced by better law enforcement and a shrinking national beef industry. Work by Rodrigo Arriagada of North Carolina State University and his colleagues suggests that the PES scheme was responsible for only 10% of the reduced deforestation on farms that took part.

The world is richer for them

As Costa Rica shows, there are many ways to raise PES money. In America and Australia, for example, markets have been established to help companies countervail the ecosystem destruction they cause, especially to wetlands. Through habitat banking, as this is known, a developer who drains a hectare of marshland can pay to restore a bigger area elsewhere. This is considered an apt form of PES for protecting biodiversity, the third great forest boon, because the services associated with it are especially hard to collect on. An obvious example is bioprospecting, the perusal of nature's genetic library for new food, medicine and pesticide ingredients.

This alone should justify conserving forests, given how many useful discoveries they yield. Aspirin, derived from willow-bark, Taxol, a breast-cancer drug, derived from Pacific Yew bark, and an emerging class of cancer drugs known as mTOR inhibitors, derived from a molecule found in soil bacteria, are examples of ground-breaking medicines that originated in nature. “Plants, bacteria and fungi make a wealth of complex biologically active molecules that would be extremely difficult for us to match,” says Samuel Blackman, associate director of experimental medicine at Merck, a large pharmaceutical company. “We're smart, but we're not that smart.”

The price of ethics

But bioprospecting has done almost nothing to raise the value of standing forests. This is partly because of difficulties in attaching property rights to species. Most tropical countries find it hard enough to attach them to forests. And even if the ownership of biodiscoveries is established, charging for them is tricky. The value of new discoveries is uncertain, and they are swiftly synthesised. The value of old ones, like aspirin, is never paid retrospectively. “When you talk of biodiversity, it's always about potential,” grumbles Aloísio Melo, of the Brazilian finance ministry. Potential can still be realised. But the strongest argument for protecting other species is often ethical. That helps swell the coffers of Western conservation NGOs, but it has few takers among tropical governments.

Still, understanding biodiversity can make it an important adjunct to conservation motivated by other concerns. For example, forests with high biodiversity will be more resilient to climate change. That is one reason why planting new forests—such as China's vast stands of eucalyptus—though good, is not nearly as good as saving natural ones.